Presented by: Mark A. Bogar, CFA, and William J. Adams
Bill: Well, it's been an interesting year in European equities. On one hand, the recovery in Europe is accelerating, and investors are starting to allocate more money to the region, but on the other hand, clearly Europe hasn't been immune to the pullback in global equities. Based on the higher volatility we're seeing, how are valuations looking today?
Mark: We're still seeing compelling opportunities in Europe and Japan today. Their recovery is two to three years behind the U.S., but the rising tide won't lift all boats. It's a perfect opportunity for active managers to take advantage of the market. The way we do that is with a barbell approach: We take half the portfolio and put it in the best value stocks, and we take the other half of the portfolio and put it in the best growth stocks. That should provide a nice consistent return over time.
Bill: Considering that barbell approach then, as the recovery gathers pace, which sectors do you think are best positioned to benefit?
Mark: I'll give you two examples of that. On the growth side, we think Germany is the best example of growth today, where that economy has been going strong for a number of years now, but we think that growth will continue, as unemployment comes down and retail sales are strong. As such, we think media names and retail stocks should continue to be a strong area in Germany. On the opposite side, on the value side of things, we think Spain is a very interesting market. Spain reorganized their banking system a few years back, and that sets the stage for the recovery we are seeing today, where auto sales are getting better and loan growth is improving. As such, we like the banks and we like the media stocks where there still is an opportunity for earnings to recover.
Bill: On that point, are you seeing any industry themes that look pretty compelling?
Mark: Well, an interesting industry theme would be Italian banks. We think that's very similar to the Spanish banking system from a few years ago. As I mentioned earlier, the Spanish banking system is recovering, and we think Italy is going to follow that same playbook today, where the estate banking systems are coming together, they're cutting NPLs [nonperforming loans], cutting costs, and that'll set the stage for recovery in the Italian economy. So Italian banks, we think, are attractive today.
Bill: There's been a lot of volatility. There must be some area that you're becoming a bit more cautious on?
Mark: Yes, we're most cautious on emerging-market-exposed equities. We're seeing the lower commodity costs as well as the slowdown in China putting a lot of pressure on exporters in Europe and Japan into emerging markets. So we're at the margin more negative on emerging-market-exposed names, and more positive on domestic-exposed names.
Bill: So overall, where do you think the European markets go from here?
Mark: We're very interested in the European markets today. We're seeing the macro recovery, the leading indicators are getting better, we're seeing an accommodative central bank, auto loans are improving, auto sales are improving. That all comes together for a very attractive investment opportunity today in Europe.